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Feds demand VaxGen conduct more anthrax vaccine tests

Associated Press

SAN FRANCISCO - Struggling biotechnology company VaxGen Inc. said Wednesday that the federal government is demanding more human tests on a new anthrax vaccine, a costly requirement that imperils the company's existence and the $877.5 million government contract along with it.

The government ordered the additional tests "unilaterally," without formal negotiations and it doesn't intend to cover the extra costs, company executives said.

Further, the government will not pay VaxGen until it begins delivering the 75 million shots ordered under the 2004 contract.

The first shipments aren't expected until 2008 now and there's a concern the company will run out of money before then. The government is the company's only customer and VaxGen's will run out of cash by the end of the third quarter without new investments.

"This places a significant financial burden on the company," said VaxGen senior vice president James Panek, who runs the company's anthrax program. Company officials have called on government officials to rescind its new demands, but they said it appears VaxGen and the government are heading to court over the matter.

The contract was the first awarded under Project BioShield, a law President Bush signed in 2004 that promises $5.6 billion to develop remedies against bioweapons.

"The modification is an extension of time and effects no substantive changes to the contract work," said Noreen Hynes of the Department of Health and Human Services, which manages most Project Bioshield contracts. "Appropriate standards for demonstrating safety, efficacy, stability and manufacturing consistency were established in the November 2004 contract, and remain."

Hynes gave no reason for the delay and company officials said they didn't know why the government is demanding the new tests.

Troubles with the vaccine's potency last year caused an initial delivery delay, but company officials said Wednesday they were close to fixing those problems. Concerned analysts and investors fretted during a conference call with VaxGen officials Wednesday that the government was seeking to get out of the contract, a scenario company executives downplayed.

"We see this as a contract dispute rather than a deterioration of the overall working relationship," Panek sad.

The company's stock plummeted 37 percent to $4.99 a share at the close of trading Wednesday on the "Pink Sheets" electronic bulletin board. The Nasdaq Stock Market kicked the company off its exchange in 2004 for failing to file timely financial reports.

Vaxgen in March was also warned by the Food and Drug Administrations that sales material handed out at a government biodefense research meeting last year contained "false and misleading statements" about the experimental vaccine and how it compared to competitor, BioPort Corp. of Lansing, Mich.

The company said it no longer distributes the offending pamphlet.

"Their financial footing hasn't been the greatest," said Sharon Seiler, an analyst for Punk, Ziegel & Co.

Seiler also said that changing the terms of the contract without consulting VaxGen could dissuade other companies from doing business with the government.

"If the government keeps moving the goal posts, then I can't imagine why anyone would want to do business with it," Seiler said.

The small biotechnology company, based in Brisbane, Calif., has tried to refashion itself as a biodefense specialist since its experimental AIDS vaccine flopped in 2003.

The company's vaccine is made by genetically engineering small bits of the anthrax virus to provoke an immune response. The vaccine requires each person to take three shots rather than the six shots required by an older vaccine.